Linking to photos stored elsewhere isn’t good practice, because you risk losing them, your blog takes longer to load, and you may have issues with Explorer (IE often doesn’t understand the specified dimensions, especially in Image widgets). For best results, first make sure the pixel width of the image isn’t larger than the maximum your sidebar can accomodate – see here: http://wpbtips.wordpress.com/2010/01/11/sidebar-width/
If it’s larger, better downsize it in an image editing application before using it; this guarantees no issues with IE, and it will give you better quality as well, because images downsized by WP lose some color and sharpness – see here: http://wpbtips.wordpress.com/2010/01/16/image-quality/
Then upload the image from your computer to your blog via Media > Add New, copy the File URL you’ll get and use that URL in the Image widget.
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